Special purpose acquisition companies, or SPACs, have become increasingly common - especially in the life science space.
Also known as blank cheque companies, SPACs are shell companies, meaning they have no commercial operation. Often they’re run by C-suite industry experts, who set up them up with the intention of merging or acquiring a viable private company once they have raised funding through their own IPO.
As the name suggests, blank cheque companies are exactly that. Investors are unaware of which company the SPAC will merge with or acquire, so they’re not investing in a business model or product but instead the people running it.
This unconventional means of taking a company public is becoming increasingly popular. That’s mainly because SPACs create a big opportunity for investment and are a more efficient way for companies to go public.
However, some people consider SPACs to be too much of a gamble. With a murky history tied up in penny stocks and back office dealing, it is clear to see that there’s some risk involved.
Throughout the COVID-19 pandemic, there’s been a spike in SPAC activity – especially within the life science industry. The fallout from the pandemic has put a lot of businesses under pressure to react and SPACs have served as a way to create a quicker, more efficient route to public markets.
Focusing on the life science industry I operate in, there have been major deals completed towards the end of 2020 in the biotech scene. Allergan's former CEO, Brent Saunders, sealed a $1.1 billion deal after Vesper Healthcare Acquisition Corp purchased The HydraFacial Co.
As well as this, Pfizer Inc and Cerevel Therapeutics Holdings Inc picked up and merged with ARYA Sciences Acquisition Corp II in another major deal. Going forward as Cerevel Therapeutics Holdings, the company uses novel approaches in its quest to bring new treatments to patients living with neuroscience disorders.
Examples of SPAC deals continue to pop up, specifically within the biotech and life science space. Foresite’s CEO Jim Tananbaum, CFO Dennis Ryan and MD Michael Rome’s blank cheque company FS Development went public back in August 2020 and in February this year acquired Gemini Therapeutics.
It’s no surprise to see biotech deals like this taking the SPAC route – with these types of deals now providing more security than the traditional IPO process.
In 2019, there were 59 SPAC IPOs, raising approximately $12 billion of gross SPAC IPO proceeds. There was a record 247 SPAC IPOs completed in 2020, raising total gross proceeds of approximately $75 billion. Is this directly due to the task of IPOs being made harder in a global pandemic, or is it a snowball effect of increased investor confidence as SPACs grow in popularity?
It is important to explore the reasons behind why SPACs are continuing to grow and what they offer over traditional methods.
Typically, business owners lose some control when taking on private equity. However, SPACs allow a significant stake in the company to be maintained. Traditional IPOs can also be very expensive to deliver, whereas SPACs typically incur the costs in the merger paid by investment from the IPO, ultimately saving a large amount of money for the company.
SPACs also provide a quicker and more reliable route to market.The process of completing a SPAC takes somewhere between two and three months (with the potential of an added 24 months to find a target). This compares to the typical two to three years it takes for traditional processes.
Blank cheque companies raised over $46 billion in the first six weeks of 2021. When you compare this to the $83.4 billion they raised for all of last year, it’s clear to see an increasing uptake of SPACs. Taking the examples I've provided in this article too, you can see that SPACs are being taken seriously and at very high stakes.
However, critics of SPACs argue that this blank cheque craze is not destined to last in the future. So, it will be interesting to see how SPACs perform in the years after the COVID-19 pandemic and after the economy has levelled off.
Right now, they present a great opportunity to go public with the ongoing volatility of the market. However, will this sudden boom just fade away?
I am confident that the debate between SPACs versus traditional IPOs will continue for some time. SPACs show no sign of slowing down, but time may paint a bigger picture of how they will play out overall in the market.
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